Small business owners who receive proceeds from a wrongful death lawsuit settlement may be concerned about the impact that the proceeds have on their federal income tax liability. Since these settlement amounts can be substantial, some fear that receiving their settlement will cause them to owe a high amount of tax to the Internal Revenue Service, but many wrongful death lawsuit settlements are not taxable by the IRS. This also means that small businesses that are forced to pay wrongful death lawsuit settlement awards cannot deduct them as a business expense.

Wrongful Death Lawsuit Settlement Overview

A wrongful death lawsuit settlement is a monetary award granted to the survivors of a person who has died due to corporate or individual misconduct or negligence. The family members of the decedent may file a lawsuit that accuses another person or a company of being partially responsible for the death of their loved one. If the court agrees, the judge may award damages and financial payments to the surviving family.

IRS Regulations

According to the IRS, any lawsuit settlement proceeds that a court awards for physical illness or injury are non-taxable. This includes wrongful death settlements, since the damages are imposed due to a court’s finding that a third party is responsible for the physical illness or injury that resulted in death. To qualify for this exception, the settlement must be compensatory, meaning that it must be a form of compensation for the pain and suffering caused in the case.

Impact on Federal Tax Return

Since compensatory proceeds are non-taxable, they have no impact on a federal tax return. However, if there are any additional proceeds that are awarded such as punitive damages, payments for emotional distress, or awards for lost wages, those payments are considered income and are subject to income tax. Punitive damages are additional financial awards that a court may give to the family of a deceased or injured person in cases where the company or individual responsible for the death showed gross neglect or disregard.

Claiming a Wrongful Death Lawsuit Settlement

Entrepreneurs who receive a wrongful death lawsuit settlement that is solely compensatory are not required to report this income on either their personal or business tax returns. If the settlement also included additional damages, though, those funds are taxable and should be included as other income on Line 21 of Form 1040.

About the Author

Selena Robinson has been writing professionally since 2009, specializing in areas such as music, business and education. Robinson received an accounting diploma from Ogeechee Technical College in 2001 and worked as a tax accountant for several years before becoming a writer. Her areas of expertise include payroll taxes, small-business taxes, general accounting, personal finance and individual income tax returns.